Economic systems

Fundamental Economic Questions Because of scarcity—every nation must answer the three fundamental economic questions: What products will be produced? How will the products be produced? For whom will the products be produced?

What to Produce? The What question Requires an economy to decide the mix & quantity of goods and services that it will produce. In US, free enterprise with consumer sovereignty answers the What question.

How to Produce? The How question Which combination of technology and resources to use for producing goods and services. Should labor be more or less capital-intensive Education plays an important role Improves the ability of workers to perform their work

For Whom to Produce? The For Whom question Which people receive the goods and services produced In a free market system Price is used to decide who will receive the goods and services that are produced. Earn more money = buy more products

Economic systems Economic system The methods used to answer the What, How, and For Whom questions. Traditional Market Command

Traditional Economy Answers the questions, the way they have been answered for generations. Inuit of Canada Amish of Pennsylvania + Reduces friction among members -- Restricts individual initiative

Read/Think/Pair/Share Market Economy Answers the three basic questions based only on voluntary buying and selling in markets. Adam Smith Invisible hand: the best interests of a society are served by markets guided by self-interest. Read/Think/Pair/Share

Market Economy -- very wealthy and very poor + inequality gives people an incentive to strive for the reward of earning more income Milton Friedman http://www.youtube.com/watch?v=RWsx1X8PV_A

Command Economy Answers the questions by a dictator or central authority Former Soviet Union China in the past Cuba & North Korea

Command Economy Socialism: based on govt. ownership of resources and centralized decision making Karl Marx Communism: classless economic system in which all resources are owned by the workers The ideal version of socialism

Mixed Economy Mixed Economy United States Answers the questions through a mixture of traditional, command, and market systems. Most countries employ a mixed economy United States Nationalization The act of transforming a private enterprise into a government enterprise Amtrak General Motors